Another guest post from Iceland, this time from Huginn Freyr Þorsteinsson.

In the early days of the present financial crisis Iceland became one of the poster children for the crash that seemed inevitable. Some commentators thought Iceland’s problems were an indicator for what would soon be the fate of other countries that had prospered in the days of the economic boom. The question was posed in early January 2009: “What’s the difference between Ireland and Iceland? – One letter and about 6-months!”

The question was valid. Although Ireland did not expand its banking system nearly as much as Iceland did the situation in Ireland was serious enough. Both countries had followed neo-liberal policies in trying to lure investors to the country with deregulation, lowering of taxes and privatization. For this the two respected countries got lauded by neo-liberal economists who stated that the proof was in the pudding – economic growth was staggering in both cases. But what is the situation now one year has gone by since the above question was posed?

I think it is fair to say that the doomsday scenarios put forward in October 2008 for Iceland have not materialized. Also that predictions for other countries such as the Baltic States, Ukraine, Ireland, Spain, Italy and Greece turned out to be wrong because they were too optimistic. The status of these countries is now catching the international media headlines whilst Iceland has somewhat gone out of the spotlight and news that Iceland’s economic contraction was smaller then envisaged, unemployment figures lower, less capital needed to put into the resurrected banks and a huge turnover from a massive trade deficit to trade surplus has not surfaced.

Three major differences separate Ireland and Iceland. One is that we do not have the Euro which is extremely helpful when we need to rely on exports and a trade surplus. The Icelandic krona gives way whilst the crisis in Ireland has little or no impact on the Euro. Once an expensive place of travel, Iceland is now actually a relatively cheap destination, helping the tourist industry staying strong despite diminishing tourism around the world. The same goes for the export industry which benefits greatly from a weakened krona as it gets more kronas for the products exported.

The second difference is that Ireland went for an all-out bank bailout whilst Iceland took deposits and matching important assets (loans to individuals and Icelandic companies etc.) and put it into new banks whilst letting the old banks go into administration. This manoeuvre was implemented through emergency legislation in October 2008 in order to protect the Icelandic economy from collapsing along with its gigantic banks (their size was 8-10 times Iceland’s GDP at the time of collapse). This means that the sovereign did not try to stand behind the big banks but used the opportunity to heavily trim them down which in turn has made Iceland’s external debt many times lower than it was in the months before the crash.

The third difference is the future unforeseen impact of pensions on the tax payers’ money. One thing we do know is that the future number of pensioners in Europe will be considerably higher than today and more money is needed to fund pension schemes. When it comes to calculating the government debt or obligations of the state such numbers are left out but it is quite evident that many states will struggle with meeting pension obligations. Iceland has a well funded pension system and as seen on the picture below will be well off in meeting these demands and will probably not have to rely on tax payer money.

Pension fund assets growing in relation to the size of the economy (OECD Pensions and Markets 2008)

The ratio of OECD pension fund assets to OECD GDP increased from 70.7% in 2005 to 72.5% of GDP in 2006. The largest asset-to-GDP ratio was Iceland’s, at 132.7%.

However, Iceland has become very indebted because of the need to take loans to support its currency, restore the banks, resurrect the Central Bank (which went bankrupt), reimburse depositors in the UK and the Netherlands for the Icesave accounts and tackle a massive government deficit. At the moment the Icelandic government is working with the IMF and the Nordic countries in order to get the economy back on track and hasten the recovery. The IMF is working in close collaboration with a left-wing majority government whose finance minister, Mr. Steingrímur J. Sigfússon, comes from the Left-green Movement. The situation for the IMF is probably quite unique as they are dealing with a crisis that is a result of radical neo-liberal policies as opposed to lack thereof. Traditionally the IMF has thought such policies were medicine for failed economies but now the case is the opposite.

The uniqueness of the Icelandic case might be seen in how multi-dimensional it is. It is a bank crisis, a debt crisis (households and companies), a currency crisis and a tainted reputation. But as events unfold in the world economy Iceland’s difficulties seem to be less and less unique. Other countries seem to be catching up quickly and even possibly have already left us behind.

Huginn Freyr Þorsteinsson is adjunct professor at the University of Akureyri.

Like this:

This is the first in a series of guest blogs from geographers around Europe. Edward Huijbens is a geographer based at the University of Akureyri in Iceland.
—
On the Friday before the big weekend in October 2008, when the whole finance sector in Iceland came tumbling down, there was tension in the air. During lunch time news a revered economist at the University of Iceland had stated that the banks were bankrupt with unforeseeable consequences for the nation at large. The was obvious panic in his voice and I rushed back to the office, where we gathered round the computer and listened to a replay on the internet of the news. We had not much to say – we were just numb and awestruck. On the Monday after the weekend big news were afoot and the PM was to address the nation on TV at 4pm. The nation came to a stand-still and we watched as the PM announced that the finance sector had capsized and might suck the whole nation in. He ended with the famous Bushian “God bless Iceland”.

Immediately it was clear that this collapse manifested regional disparities within the country. Around the small villages and towns around the cost people shrugged and said; we have had recession here for 30 years, this will not change much. Whilst in the capital region Reykjavík and bigger towns namely Akureyri and Reykjanesbær, the effect was felt more, but also the need to invest all the bubble capital accumulating was mainly manifest there, in highrises, roadworks, big building projects and new boroughs. Now these are all half-done and on hold.

Mostly people were at first numb, did not know what had happened and how. In August 2008 the nation was on the top of the world, with a booming economy and just having won a silver medal in the Olympics in handball. When the handball team returned home tens of thousands filled the streets in Reykjavík as they received a royal welcome – national pride was rampant and all of a sudden it was all gone. Overnight we became equated with Zimbabwe and the likes in international media.

Then it began to dawn on some that the system we had built was fundamentally corrupt, through nepotism, and the ideological dogma of neo-liberalism was flawed. This was of course obvious to many beforehand, but the debate could never be sustained in the face of the amazing wealth that seemed to be pouring into the country. The only political party (the left green) that raised concern was absolutely ridiculed. As one left green parliamentarian suggested that the banks should just leave the country and set up HQ in London, the media uproar was immense.

As it dawned on the general public, various groups started to emerge and talk on various issues: general mis-trust at the political establishment was rampant so new ones formed. The most prominent one started the first Saturday after the collapse in October to rally people at 3 pm on the centre square in Reykjavík in front of the parliament house. There for 30 minutes 3-4 people would give short speeches on their take on the situation and the organiser, the well known civil liberties activist Hörður Torfason, would talk to people reminding them to come next Saturday. His aim was simple, to come every Saturday until three of his demands would be met: 1) That the director of the Central Bank would be ousted, 2) the government resigns and 3) that a general elections will be called.

The firm use of public space to voice simple clear demands became the platform for the change that would in the end occur. People held on to these meetings, and the media made more and more of them as people started coming in their thousands. What at first was a handful of people had by January 2009 become at least 10,000 people (bear in mind in Iceland the population is 320,000 in total). This mass of people simply could not be ignored and when the parliament reconvened after Christmas mid-January, Hörður urged all to come to the square and bring anything that could make noise – this time they will listen. People grabbed pots and pans mostly and filled the central square banging them along with percussionists and blaring horns. Inside the parliament people needed to shout to be heard, but still the parliament members and PM pretended as if nothing was going on. This so infuriated people that they came back the next day and the day thereafter and what unfolded was what later was called the “Kitchenware” Revolution and the government resigned. An interim government took over and general elections were called. There was change and a left government gained clear majority – but now, almost a year on, we are in the interesting situation that this new government seems to be doing all it can to resurrect the former system that collapsed in all its nepotistic and corrupt glory. We are a bit confused up here now and what next we do not know, except it seems clear that it is the tax-payer who will pay.

The lesson in this for me is that clear demands have to be set, with a clear structure and platform for the voicing of these demands: where come hell or high water, the demands will be voiced, and if not heard accompanied by pots and pans. For me the pivotal role that public space plays in the strategic locations, such as ours in Reykjavík, cannot be underestimated.

The Irish Times has reported today that several financial institutions that are having their (bad) loans transferred to NAMA are asking for the state agency to reduce the amount of documents and data required for the transfer to be processed. As it stands at the moment, the institutions are requested to provide over 1,000 pieces of info for each loan facility (The Irish Times, 24/03/10), including key valuation data. The amount of paperwork to be produced is quite huge, and some lending institutions have expressed a concern with the time and staff that it takes to collect the information and to report back to NAMA in order for the loan to be transferred to the state agency’s portfolio. What makes the gathering of data even more complex is the fact that many of the required information were not on the original loans’ paperwork. This is maybe for this very reason that the financial institutions’ request to cut the amount of data required by NAMA and to fast-track the transfer of their loans to the state agency comes as a bit of a surprise: didn’t we end up in this situation as the result of a lack of rigor, proper procedures, and transparency in the lending process by the very financial institutions that are asking for a sped-up (expedited?) process?

Tanaiste Mary Coughlan has come under fire for her recent comments, during a BBC interview, about young people emigrating from Ireland. Coughlan appears to suggest that emigration is a welcome rite of passage, and that current emigrants from Ireland have the social capital to allow them to move freely. Her comments have been criticised by fellow politicians, and by letter writers to newspapers who claim she is understating the crisis of emigration.

The outrage about Coughlan’s comments stem in part from a refusal to acknowledge that emigration from Ireland continued during the Celtic Tiger era. Indeed, geographer Bronwen Walter has pointed out that many of those who emigrated from Ireland to the UK in this period ”were facing a range of experiences of disadvantages and limited options for improving their lives” (2008: 189). These emigrants, and the social and economic conditions that led to their departure from Ireland, are among the hidden stories of the Celtic Tiger.

One consequence of the denial of recent emigration is that emigration statistics, limited though they are, are being used to construct a contemporary moral panic. Yet, even in the middle of the Celtic Tiger era, thousands of young Irish worked in Australia, New Zealand and Canada on one-year working holiday visas, and their migration was celebrated rather than seen as a cause for concern. There has clearly been an increase in this type of temporary migration (see Figure 1), but from an annual base of over 10,000 over a sustained period.

Figure 1

Similarly, there is as yet no clear evidence for a significant increase in Irish emigration to the UK, at least in terms of National Insurance numbers issued to Irish nationals (see Figure 2). In other words, accounts of the increase in contemporary emigration from Ireland need to take into consideration the baseline levels of emigration during the Celtic Tiger era.

And what of current, well-educated emigrants from Ireland, with their degrees and their Phds? We have to hope that their experiences do not mirror those of well-educated immigrants to Ireland, whose qualifications and experiences were often discounted in Celtic Tiger land. Research by the ESRI, for example, highlights the fact that it is difficult for many immigrants in Ireland to gain access to more privileged jobs (e.g. managerial, professional), regardless of their qualifications.

It appears, from CSO publications, that there is an increase in emigration from Ireland. Just who those migrants are, and their reasons for and experiences of migration, are questions we still need to answer.

In recent days two conflicting reports have emerged as to the health of the Irish residential property market.

According to the Irish Independent, one of the two Irish home-registration firms, Premier Guarantee, did not register a single house in January. Premier Guarantee’s larger rival, Homebond, only registered 149 houses in January, including just 24 in Dublin. At the peak of the property market in 2006, Homebond was registering 6,122 houses a month or about 72,000 in a full year. Premier, the smaller of the two registration services, was registering about 2,117 houses per month, or almost 25,000 per annum. Of the 149 houses registered with Homebond in January, 62 were in Cork, 16 in Kildare and 24 in Dublin. In most of the other counties there were less than three houses registered, with many counties only registering a single house. Premier Guarantee and Homebond provide structural defect cover for new homes in the first 10 years after construction. The number of new homes registered with these firms is regarded as a reliable indicator of Irish housing starts.

However, data emanating from Property website Myhome.ie identifies a threefold increase in the number of ‘sale agreed’ second-hand homes in January compared to the same time last year. According to Myhome.ie, 658 properties reaching sale agreed status in Dublin last month compared with just over 200 in January 2009. Similar trends were seen in Kildare, Wicklow and Meath.

These conflicting reports raise a number of questions about the underlying trends at play in the Irish residential property market. The Myhome.ie data may be capturing some pent-up demand among a cohort of buyers, who are eager to snap up what they perceive as bargains in the Greater Dublin Area. If so, is it only a matter of time before this pent-up demand is expended? In that case, is the Myhome.ie data indicative of a dreaded “dead cat bounce”, prior to a prolonged property market slump? Even if Myhome.ie has uncovered positive property trends in Dublin, Kildare, Wicklow and Meath, the residential property market outside of Leinster may be in a far worse condition than the Myhome.ie figures suggest.

One may be tempted to withhold judgement until a detailed property price index is released. This may take longer than expected: the Permanent TSB / ESRI House Price Index will now be issued on a quarterly basis rather than the current monthly format. The reason cited for this? low sample size.

Recent attention to the closure, followed by re-opening, of Carluccio’s (Which itself had only recently replaced the long-established Graham O’Sullivan’s) on Dawson Street in Dublin raises a number of interesting issues regarding city centre rents, recent planning practices, and attitudes to retail trade amongst a number of bodies within Dublin city centre.

Throughout the boom years a number of prime retail areas in the city centre were designated by Dublin City Council as Architectural Conservation Areas (ACA’s), and, directly connected to this, Schemes of Special Planning Control (SSPC) (An area had to be designated as an ACA in order to become a SSPC). While seeming somewhat innocuous in their own right, there was a particular rational for so many retail areas to be designated as such. A primary aim of a Scheme of Special Planning Control is to remove what are perceived as ‘undesirable uses’ (fast food outlets, convenience stores) and attain ‘Higher Value Uses’, or ‘niche’ shopping, in an area. Furthermore, such uses, it is perceived, will then attract higher rents, and higher land values which would support more of the same higher end uses. However, in reality, prior to the bust, it seemed it was those stores that were best able to pay higher rents that remained in an area where land values were going up. This, somewhat ironically, includes fast-food outlets, such as McDonalds and Burger King.

If it is these high rental values which are now turning out to be the nemesis of the viability of trading in the city centre, the question must be asked as to why higher land-values were heralded as one of the positive outcomes of the BID mechanism. It seems that the desire for more up-market land-uses only ads to an already existing cycle of unsustainable rent increases, which in turn, as evidenced by the growing number of empty units on streets such as Grafton Street, leads to vacancy.

Philip Lawton

The recently closed West Jewellers on the corner of Grafton Street and South Anne Street with another vacant retail premises in the background. Photo by Philip Lawton, 2010

The Irish Times reported two interesting stories on Saturday which both raise questions about NAMA.

The first story concerned the re-valuation of two development sites. The first site in Athlone, Westmeath, valued at €31m in 2006 has just been re-valued at €0.6m (a drop of 98%). The second site in Sallins, Kildare valued at €17.5m at the market’s peak is now valued at €4m (a drop of 73%), holding up a little better in value one presumes because of its proximity to Dublin and its siting on a commuter rail line. As we’ve posted previously, these drops in valuation are not exceptions. City centre prime sites such as the 24.9 acre Irish Bottle Plant site in Ringsend bought for €412m in 2006 is, according to the Dublin Docklands Development Authority (DDDA), presently worth €50m (a drop of 87%), while its Long Term Economic Value (LTEV) is €62.5m. The national average price paid for farmland in 2009 was €9,678 per acre, a drop of 43.3 per cent on the average price of €17,081 per acre in 2008 (and this was on top of a drop in 2008). It therefore seems likely that both zoned and serviced development land and unzoned land in Ireland has dropped substantially in value, probably somewhere between 70-98% depending on the site and the original amount paid. 36% of NAMA’s portfolio is land, with loans worth €27.8b attached to them, and it is likely that a proportion of the ‘development loans’ category (28%, €21.8b) also consists of development land. 67% of NAMA portfolio relates to land and property in Ireland, and although we do not have details of the geographic location of all NAMA land holdings it is probably a fair bet that 67% or more of it resides in Ireland.

The value of land destined for management by NAMA then is likely to be far below the 30% ‘haircut’ the government has proposed to pay. It is difficult to see how a profit, one of the aims of NAMA, could be made with respect to land holdings over its proposed life span unless a 70-90% haircut is applied to the original loan valuation. It is also hard to believe that prices will rise back up to anywhere near 2005/06 prices any time soon given the grossly inflated prices paid for land at the peak of the market and the present supply of zoned land. As Sinead Kelly has posted on IAN, land values spiralled upwards in Ireland in the early 2000s, jumping in value from just under €10,000 per hectare in 1998 to over €58,400 per hectare in 2006 (see Figure 1), making Irish land the most expensive in Europe, nearly twice the cost per hectare of any other European country and 3 times greater for all but 4 countries (Spain, N. Ireland, Luxembourg, Netherlands) (see Figure 2). According to the DEHLG housing stats, in June 2008 there were 14,191 hectares of zoned, serviced housing land in the state that could accommodate 462,709 additional housing units (to put that in perspective, the number of households grew according to the Census by 342,221 between 1996 and 2006), and this doesn’t include other kinds of zoned land. Which brings us on to the second story.

Figure 1: Irish Land Values 1973-2006 (€ per hectare)

Figure 2: European Land Values by Country (€ per hectare)

The second story concerned the Waterford County Draft Development Plan which went on display on Friday and proposes to rezone 70-90 percent of the 800 hectares zoned in the previous plan, bringing it into line with changed circumstances, projected population growth and national and regional planning guidelines. According the Irish Times, one of the maps shows ‘large tracts of land, acquired in recent years by developers at astronomical prices, reverting to agricultural use.’ Such rezoning makes a lot of sense and Waterford should be commended for taking the lead, but it also raises a number of questions. Why was the zoning in the previous plan so excessive (and likewise in other counties)? Will such rezoning occur in other counties as they formulate their draft development plans? How much of the rezoned land is projected to be moved into the NAMA portfolio and what are the implications of any rezoning for its projected value? Will there be political pressure to make sure that it is NAMA land that is kept zoned to maintain some kind of value above agricultural prices? Clearly the answers to the latter questions will have an impact on the valuations attached to NAMA managed land and need to be factored into any calculation of present and future valuation.

As these two stories illustrate, there are good reasons as to why people are concerned about NAMA and whether it will be able to fulfil its remit. Already the IMF has noted that it is unlikely that NAMA will get credit moving in the Irish economy. If the valuations of land and property are wildly inaccurate, and the ‘haircut’ paid by the government is in excess of the true value, then NAMA could be a very expensive exercise that the Irish tax payer will shoulder for years to come. One can hope that government knows what it is doing, and maybe they can reassure on all the questions above, but one can’t help being worried pending such reassurance.